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On Printing Money and Debasing The Currency

“The issue of the renminbi is one that is an irritant not just to the United States, but is an irritant to a lot of China’s trading partners and those who are competing with China to sell goods around the world. It is undervalued. And China spends enormous amounts of money intervening in the market to keep it undervalued.”

-Barack Obama at the closing of the recent G-20 meeting in Seoul

If I asked any Federal Reserve or Treasury official, "would you prefer the US dollar to be higher or lower against China’s currency?" what do you think the answer would be. How about this question: "If you could snap your fingers and depreciate or appreciate the US dollar against a basket of currencies, which would you prefer to do?" Here’ s another one: Would you mind it if the EURUSD rate settled back toward purchasing power parity, which would have the dollar rising some 20% against the euro?

Do I have to get the Nicholson clip out again? Tim Geithner is fooling no one when he says the US is not trying to weaken the dollar. Of course it is.

Now, if the US had interest rates at 4 or 5 percent instead of zero percent or if fiscal policy weren’t dead, we wouldn’t see the Fed doing quantitative easing. Instead the Fed would be acting to supplement fiscal policy, using ‘conventional monetary policy’ to boost aggregate demand, which means lowering the Fed Funds interest rate. The effect on the exchange rate of this policy response is to weaken it. But, of course, rates are zero percent, not 4 or 5 percent. So the Fed is forced into QE.

Does quantitative easing debase the currency? No.

QE doesn’t work. Philip [Coggan] notes that US long-term rates were higher when they finished QE than when they began. Money supply (estimated M3) was lower afterwards than before. Rates only started dropping when QE stopped. QE is just an asset swap that drains income from the real economy.

-More on the Federal Reserve and Quantitative Easing

But that doesn’t mean the Fed isn’t trying to debase the currency. It’s just that the Fed doesn’t understand credit. QE won’t work unless you get some sort of feed through into credit growth.

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).

– Ben Bernanke, National Economists Club, Washington, D.C. November 21, 2002 Federal Reserve

What about money printing? Is the Fed just printing money? Yes. That’s what expanding its balance sheet means. It is creating previously non-existent dollar credits out of thin air and placing them on its balance sheet to buy financial assets.

I liked Ed’s piece on QE called Does Ben Bernanke Believe The Stuff He Writes?. What caught my eye was his line, "As for monetary policy, while QE does not create new net financial assets, it is money printing because it is a swap of bonds for electronic credits of equivalent value i.e. money. The Fed is effectively ‘monetizing’ the government’s debt." Under that definition of money he is correct. But my point below will be that functionally it doesn’t do much of anything for aggregate demand.

As any student of Economics 101 realises, you can control the price of something, or the quantity, but not both simultaneously.

-Amateur Hour at the Federal Reserve, Marshall Auerback

I am talking about base money, of course. Marshall is concentrated on broader money aggregates and credit. The problem we both see is the credit feed through mechanism. QE is a supply side solution to a demand-side problem. It is the demand for credit by creditworthy customers which is keeping credit growth subdued. And no amount of money printing will change this. OK, maybe $8-10 trillion will, but is this what you want?

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

5 Comments

  1. Susijumala says:

    I am having full of questions, because I am not entirely aware of the US structural economy, but I try to catch up.

    First of all it seems that every single country follows blindly the mantra “exporting is the divine key opening the door for growth.” If everyone follows this and planet’s net export should increase I suggest putting up more SETI program dishes and satellites up. What’s the other way round, decreasing import? Could it work? Can’t the US start programs in areas such as mining, refining and manufacturing i.e. doing the whole cycle itself and aim these products on domestic markets with labour of its own citizens? Importing goods that you simply cannot produce, like growing bananas on tundra is completely different story, but this shouldn’t be major import anyways, regarding to the US and its climate. Globalization has managed to bring the prices down, but aren’t there any rabbit holes also like high unemployment rates, needs of food stamps etc.?

    Second, should this import-dependant cycle decrease help but no private company or individual won’t do this, partly because they may seem to be insolvent (putting up a new mining company or extending existing one may seem to be risky) and partly because banks are not banks anymore, but traders. This means they do not give out loans because there’re better profits elsewhere. Is it impossible to create a federal company? This may have got two obstacles I can figure: 1) Huge opposition of government-backed companies, but then again there were already GM, Fannie and Freddie etc. 2) Problem of increasing government spending in times of slow or non-existent growth, neverminding what John Maynard would say about it. Is there any other obstacle? Couldn’t the imaginary federal mining company to be sold later on some potential US candidate(s), just like it is happening now with GM?

    Third, I think I saw recent graphs showing M3 decreasing in the US quite rapidly, but it’s not yet even comparable to the growth of M3 during the last 10-20 years. Does the tax-cutting (or helicopter drop) “help” i.e. increasing the healthy M3 and decreasing the unhealthy M3? Is Federal Reserve aiming simply to increase this M3 based on creating domestic inflation in the US? What are the correct medicines to make this all healthy and sustainable, concerning M3?

    And fourth, based on the second bunch of questions, is it alarming to see how the US domestic investment grade has been decreasing nearly to non-existent during the past 3-4 decades? I recall president Obama speaking in G20 meeting in Seoul that America’s interest is to grow and how filling this goal would also help every other country to grow. Isn’t this investment grade decreasement contradictionary to mr. Obama’s speech? If it is and nothing I can figure out how to make the wheels rolling then what can be done?